Tax reform unlikely, but groups push low-income tax credit

There will be no major proposals coming this year from the Republican Legislature’s new Joint Committee on Tax Reform, although a coalition of community organizations is pushing for a tax credit specifically aimed at low-income workers, a proposal with possible bipartisan support.

Sen. Mike Hall, R-Putnam and a co-chairman of the tax reform committee, confirmed Monday that they would make no major proposals, but said that if the Legislature gets in budget negotiations with the governor, that could “open up” some of the work they did toward tax reform.

Hall spoke at a forum on establishing a state earned income tax credit (EITC) in West Virginia.

Twenty-six other states have a state EITC, a tax credit for low-income people that has the support of both parties. Democrats tend to like the EITC because it is a safety net program, effective at raising the incomes of the working poor. And Republicans tend to like the program because you must already have an income to qualify — it only goes to people who are working and is designed not to discourage work.

The EITC is kind of like a negative income tax. Instead of the government taking away a percentage of your pay, as with an income tax, the government pays back a certain percentage of your pay, up to a certain point.

The more money low-income workers are able to make in wages from a job, the more the government will aid them in a tax credit, until it phases out as workers’ earnings approach “middle income.”

About 157,000 West Virginia families received an average of about $2,200 last year from the federal EITC, according to Joseph Hotz, a Duke University economist who studies the tax credit.

Every state EITC functions as a percentage of the federal EITC, a program that was made permanent in Congress’ budget deal last month.

So, if West Virginia was to enact a state tax credit at 15 percent of the federal one, low-income workers would receive a credit on their state income tax equal to 15 percent of the federal tax credit they receive.

Going by Hotz’s numbers that would mean an additional state tax credit of about $335 for the average low-income family, with a state EITC.

It would also mean about $50 million less in revenue for the state.

In a year where the state faces an expected deficit of more than $350 million, that’s a big reason why a state EITC may face long odds in the Legislature. (That’s also the reason why no major proposals are likely to come from the tax reform committee’s work over the last 10 months.)

Hall, also the chairman of the Senate Finance Committee, said it would be difficult, but he was intrigued by one idea of paying for the tax credit.

Every year West Virginia spends about $35 million on the Temporary Assistance for Needy Families (TANF) program, the equivalent of cash welfare. West Virginia must spend that money on the program in order to qualify for more than $100 million in federal TANF funds.

But the federal government allows states, if they choose, to spend that money on a state EITC instead, without losing the matching funds.

Of the 26 states with a state EITC, 18 fund it through TANF money.

Ted Boettner, director of the progressive West Virginia Center on Budget and Policy, said he anticipated a bill establishing a state EITC will be introduced with bipartisan support.

Both he and Hotz pointed to evidence that the EITC brings more people into the workforce.

Boettner pointed to the fact that low-income workers are making less money per hour, after adjusting for inflation, than they were 35 years ago.

And he said a state EITC could help rectify a quirk of West Virginia’s tax system — the poor pay a larger share of their income in state taxes than the rich do. (Those making less than $29,000 pay about 8.7 percent of their income in West Virginia state and local taxes, while those making more than $144,000 pay about 6.5 percent, according to the Institution on Taxation and Economic Policy.)

And as for passing a tax credit during a state budget crisis?

“If something is a priority we always pay for it,” Boettner said. “It just depends on making it a priority.”